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Question(s) / Instruction(s):

     An auditor determines that a client has not accounted for a certain material item in conformity with generally accepted accounting principles. This fact is prominently disclosed in a footnote to the financial statements. The CPA does not agree with this departure from GAAP and should
     a.     issue a qualified the opinion because of the deviation from generally accepted accounting principles.
     b.     disclaim an opinion.
     c.     not allow the accounting treatment for this item to affect the type of opinion because the deviation from generally accepted accounting principles was disclosed.
     d.     express an unqualified opinion and insert a middle paragraph emphasizing the matter by reference to the footnote.
     In determining the type of opinion to express, an auditor assesses the nature of the reporting qualifications and the materiality of their effects. Materiality will be the primary factory considered in the choice between
     a.     an “except for” opinion and an adverse opinion.
     b.     an “except for” opinion and a disclaimer of opinion.
     c.     an adverse opinion and a disclaimer of opinion.
     d.     a qualified opinion and a piecemeal opinion.
43.     When setting a preliminary judgment about materiality,
challenging     a.     more evidence is required for a low dollar amount than for a high dollar amount.
     b.     less evidence is required for a low dollar amount than for a high dollar amount.
     c.     the same amount of evidence is required for either low or high dollar amounts.
     d.     there is no relationship between it and the dollar amount of evidence needed.

44.     When allocating materiality, most practitioners choose to allocate to
challenging     a.     the income statement accounts because they are more important.
     b.     the balance sheet accounts because there are fewer.
     c.     both balance sheet and income statement accounts because there could be errors on either one.
     d.     all of the financial statements because there could be errors on other statements besides the income statement and balance sheet.
challenging     The expectation of misstatements after considering the effect of internal control is most appropriately thought of as
     a.     control risk and acceptable audit risk.
     b.     inherent risk.
     c.     the combination of inherent risk and control risk.
     d.     none of the above.
46.     Which one of the following statements about the cycle approach to auditing is not correct?
challenging     a.     There are differences among cycles in the frequency and size of expected errors.
     b.     There are differences among cycles in the effectiveness of the internal control structure.
     c.     There are differences among cycles on the auditor’s willingness that material errors exist after the auditing is complete.
     d.     It is common for auditors to want an equally low likelihood of errors for each cycle after the auditor is finished.
challenging     When the auditor has the same level of willingness to risk that material errors will exist after the audit is finished for all five cycles,
     a.     a different extent of evidence is needed for various cycles.
     b.     the same amount of evidence will be gathered for each cycle.
     c.     he/she has not followed generally accepted auditing standards.
     d.     the level for each cycle must be no more than 2% so that the entire audit does not exceed 10%.
challenging     Which of the following factors is least likely to contribute to opportunities leading to misappropriation of assets?
     a.     Inadequate controls related to segregation of duties.
     b.     Not requiring mandatory vacations.
     c.     Disregard for the need to monitor or reduce risks of misappropriating assets.
     d.     Presence of large sums of cash or inventory items of high value.
49.     When discussing inherent risk (IR) and the audit risk model, which of the following is not true?
challenging     a.     IR is inversely related to planned detection risk.
     b.     IR is inversely related to evidence.
     c.     IR is the susceptibility of the financial statements to material error, assuming no internal controls.
     d.     IR is the auditor’s assessment of the likelihood that errors exceeding a tolerable amount exist in a segment before considering the effectiveness of internal accounting controls.
challenging     When discussing acceptable audit risk (AAR) and the audit risk model, which of the following statements is true?
     a.     The terms audit assurance, overall assurance, or level of assurance are synonyms for AAR.
     b.     AAR is objectively determined by the auditor.
     c.     AAR is the risk that the auditor is willing to take that the financial statements are fairly stated after the audit is completed and an unqualified opinion has been reached.
     d.     When the auditor decides on a lower acceptable audit risk, it means the auditor wants to be more certain that the financial statements are not materially misstated.
51.     Which of the following is an example of the concept of inherent risk?
     a.     Humans make more errors than computers; therefore, a manual accounting system is riskier than a computerized system.
     b.     Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced.
     c.     Loans receivable for a finance company are less likely to be collectible than those of a bank.
     d.     Audits with larger sample sizes are less risky than those with smaller sample sizes.
52.     Tolerable misstatement as set by the auditor
challenging     a.     decreases acceptable audit risk.
     b.     increases inherent risk and control risk.
     c.     affects planned detection risk.
     d.     does not affect any of the four risks.
53.     The audit risk model is
challenging     a.     a planning, testing, and evaluation model.
     b.     useful in evaluating results but of limited use in planning.
     c.     useful in planning, but of limited value in evaluating results.
     d.     useful when performing the tests of balances, but of little value in either the planning or evaluation stages.
challenging     Research in auditing has shown that if a revised risk is used in the audit risk model to determine a revised planned detection risk, there is a danger of
     a.     not decreasing the evidence sufficiently.
     b.     not increasing the evidence sufficiently.
     c.     over-auditing.
     d.     increased lawsuits against the auditor for failure to follow GAAS.
     The audit risk against which the auditor requires reasonable protection is a combination of two separate risks. The first of these is that material errors will occur in the accounting process by which the financial statements are developed, and the second is that
     a.     a company’s system of internal control is not adequate to detect errors and frauds.
     b.     those errors that occur will not be detected in the auditor’s examination.
     c.     management may possess an attitude that lacks integrity.
     d.     evidential matter is not competent enough for the auditor to form an opinion based on reasonable assurance.

     For financial reporting purposes, a change from straight-line to an accelerated depreciation method was disclosed in a note to the financial statements and has an immaterial effect on the current financial statements. It is expected, however, that the change will have a significant effect on future periods. The auditor should express a(n)
     a.     qualified opinion.
     b.     unqualified opinion.
     c.     consistency exception.
     d.     adverse opinion.
     An auditor is confronted with an exception considered sufficiently material to warrant some deviation from the standard unqualified auditor’s report. If the exception relates to a departure from generally accepted accounting principles, the auditor must decide between expressing a(n)
     a.     adverse opinion and an unqualified opinion with an explanatory paragraph.
     b.     adverse opinion and an “except for” opinion.
     c.     adverse opinion and a disclaimer of opinion.
     d.     disclaimer of opinion and an unqualifed opinion with an explanatory paragraph.
challenging     Which of the following underlies the application of generally accepted auditing standards, particularly the standards of field work and reporting?
     a.     The elements of materiality and relative risk.
     b.     The element of internal control.
     c.     The element of corroborating evidence.
     d.     The element of reasonable assurance.
challenging     For a reporting entity that has participated in related-party transactions that are material, disclosure in the financial statements should include
     a.     the nature of the relationship and the terms and manner of settlement.
     b.     details of the transactions within major classifications.
     c.     a statement to the effect that a transaction was consummated on terms no less favorable than those that would have been obtained if the transaction had been with an unrelated party.
     d.     a reference to deficiencies in the entity’s system of internal accounting control.

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